It's showtime! It appears traditional financial institutions have collectively decided it's time to dip their toes in the chilly waters of the crypto market. Suddenly, the big legacy finance players are circling the industry. Wall Street giants like BlackRock and Franklin Templeton await the SEC's approval for their Bitcoin ETF filings. NASDAQ is also seeking to offer institutional crypto custody services. Out of the blues, crypto has gone from an outlier in the financial markets to a mainstream asset class. The global adoption index indicates that many institutional players are increasingly embracing the allures of crypto assets. Big Banks, Hedge funds, wealth managers, and Brokers/Dealers are delving into the crypto markets.

Riding on the euphoria of the moment, Bitcoin hit $40k on tailwinds of a potential ETF approval, coupled with the Bitcoin halving being just four months away. Additionally, several reputable and influential investment firms filed applications for spot Bitcoin ETFs, signaling a shift in market sentiment. All of these are happening amidst the ongoing regulatory onslaught against crypto incumbents. Of course, this has got many tongues wagging about the timing. Some have even come up with the "BlackRock conspiracy theory." Connecting the dots, could this be the tipping point that leads to other big institutional finance titans subsequently laying their cards on the table? Could this be opening the floodgates for institutional adoption? This piece summarizes our thoughts on why the market may reach an inflection point for institutional adoption with the Bitcoin ETF.

Identifying Inflection Points in Markets

Practically everything in markets is cyclical. Cycles are inevitable. They have persisted since the inception of markets and will exist for as long as humans engage in the pursuit of profit. An inflection point marks the turning point in the market cycle. Markets are constantly changing, shaped by numerous factors, from macroeconomic shifts to industry-specific events. Learning to identify these pivotal moments can help investors unlock significant investment opportunities. It is no different for the crypto industry.

The first wave of institutional adoption fueled the bull run in 2020 - 2021. The catalyst was that institutions added Bitcoin to their balance sheet as investment vehicles. Which saw the likes of MicroStrategy, Tesla, and Grayscale come into the mix. However, a lack of regulatory clarity and the reputational contagion attached to the Black Swan events (Terra, FTX, etc..) in 2022 have had a knock-on institutional adoption. The industry is gradually moving past those events, and with the spot Bitcoin ETF in view, it could be the catalyst that triggers the next wave of institutional adoption.

Why Bitcoin ETF Matters for Institutions

One of the biggest hurdles to institutional adoption is the custody of assets. Fidelity's Institutional Digital Assets Study reports that 35% of respondents identified security concerns as a critical investment obstacle, while 26% expressed concerns surrounding private key management. Most institutional investors would rather avoid the technicalities of holding Bitcoin directly, which involves a self-custodial wallet and private key management. The problem with self-custody is that the level of competence required to securely custody your assets is high. If you lose your private keys, get phished, or accidentally send coins to the wrong address, there is simply no recourse. The risk/reward ratio doesn't make sense for most institutional investors.

In traditional finance, investors want to purchase assets with a brokerage account and rely on a trusted fiduciary to secure them. For instance, if you're an investor who wants to buy gold, you can buy a gold ETF with your brokerage account. A spot ETF could be suited for any investor who wants direct exposure to Bitcoin without holding and managing Bitcoin through self-custody. It eliminates the need to have an account with a cryptocurrency exchange. If spot Bitcoin ETF filing is approved, it will make buying Bitcoin as regulated and simplified as purchasing silver for investors. The bull case for institutions can be summarized into these two points below;

1. Extended accessibility across institution funds
2. Market validation/acceptance

Now, let's go over the points mentioned above.

Extended Accessibility

Before now, wealth managers and custodians who control large funds couldn't easily access Crypto or Bitcoin investments directly through conventional channels. With an approved spot ETF on the horizon, that narrative could change. An ETF is a more direct offering that would enable a broader investor populace to access Bitcoin investment. Usually, investors prefer to stick to platforms and channels that they are conversant with. A spot ETF allows them to invest in these platforms that they are familiar with already, giving them a sense of safety. Compared to direct ownership, which requires a certain level of self-education on custodial practices to onboard, the spot ETF offers both retail and institutional investors exposure without the burden of self-custody. It will also give institutions the infrastructure they feel comfortable with. The truth is, as humans, we are creatures of habit, so we'd like to trade how we usually do.

Market Validation/ Acceptance

With many Wall Street and traditional finance giants filing applications for spot Bitcoin ETF applications, this is a big deal for the crypto industry. Mainstream firms applying for spot Bitcoin ETF implies a formal validation or approval of the asset class, which will massively improve perceptions around crypto's legitimacy as an asset class and facilitate broader adoption. The initial skepticism from a lack of confidence in the asset class is gradually fading.

The SEC’s approval of a spot Bitcoin ETF could go a long way to alleviate investors of many of these compliance pain points as a regulated investment product with more comprehensive risk disclosures. It would also provide market participants with long-demanded regulatory clarity to operate in the crypto industry. As it stands, a more developed regulatory framework would mean more clarity, and could improve the competitiveness of the US in the crypto industry.

Furthermore, a spot ETF traded on major exchanges would also offer better liquidity and better price tracking compared to other investment products, such as futures products, which have been in existence before.

Effects of Potential Bitcoin ETF Approval

Following the growing optimism surrounding the approval of a spot Bitcoin ETF, CCData reports that AUM for Bitcoin-based investment products increased 11.1% to $23.2 billion in October and November, recording 73.3% in market share. These events, among others, have ignited investor sentiment and raised hopes for the imminent approval of the first spot Bitcoin ETF. Looking at the potential inflows from ETFs, market narratives about the forthcoming Bitcoin halving (April 2024) suggest that 2024 could be a big year for Bitcoin.